BBC Caribbean
06 August, 2004

Dom Rep faces debt default

International financial analysts are concerned that the Dominican Republic may default on its foreign debt as it has missed an interest payment on an international bond.

The Dominican Republic has been in the throes of an economic crisis precipitated by the collapse of the country’s third largest bank last year.

The government bail out of the bank cost the equivalent of 20% of the country's GDP.

Richard Francis, associate director from the credit rating agency, Standard and Poors told BBC Caribbean Radio the agency gave the country a Double C rating, the lowest is given to a government before a likely default.

"We see the likelihood that they're going to default is pretty high and there was a $27 million payment on one of their bonds that was due on the end of July," he said. "Technically, there is a 30-day grace period to pay that interest payment and to date they haven't done so.

"They've indicated that they intend to do so but it indicates the severe problems they're having in paying their debts."

Francis also explained what impact a default can have on the country.

"In the short term it might alleviate some of their problems because instead of paying off the debt, it would allow the government to use the money to pay for necessities for the population," he said.

"In the medium term, it will certainly have an impact because it would be hard not just for the government but the private sector to access credit in the future. It would severely affect capital flows to the country and also dissuade investors from coming to the country and that obviously has an impact on growth."

He said the whole situation could have been avoided if the country's institutions were stronger and better equipped.

"This crisis could have been averted if they had better banking regulation and supervision but ultimately was part of the failure," he said. "Since that time, the government has scrambled to turn the situation around but they have made what I would call a number of policy mis-steps."

The signs of increased hardship are evident throughout the capital Santo Domingo where basic food prices have nearly doubled in the last year.

Shortages of gasoline and propane have laid up many automobiles, and electricity blackouts last as long as 20 hours, blanketing much of Santo Domingo in darkness at nightfall.

Incoming leader Leonel Fernández, who served a previous term as president in the 1990s when the Dominican Republic was one of the region's fastest-growing countries, is under pressure from international creditors to rapidly come up with a plan for dealing with a string of costly bank failures and soaring prices for imported oil and natural gas.